Caution greets QBE’s premium upgrade

QBE Insurance Group
’s upgrade of its premium forecasts has received a cautious response from fund ­managers and analysts who point to continuing margin and catastrophe costs as concerns.

Chief executive
Frank O’Halloran
said at the insurer’s annual general meeting on Tuesday QBE expected its net earned premium to rise by 30 per cent this year due to recent acquisitions and an improved outlook for US crop insurance.

Management expects insurance profit to increase by more than 30 per cent as a result.

Even though it is upgrading premium forecasts from earlier guidance of between 22 per cent and 25 per cent, the company is sticking by margin guidance of between 15 per cent and 18 per cent.

Arnhem Investment Management executive director Mark Nathan said the nature of the upgrade suggested it was a one-off. “The upgrade is based on real numbers, and partly due to premium rate increases expected to lift from 2 per cent to 3 per cent," he said.

“But one swallow doesn’t make a summer and we’d probably need a lot more catastrophes and a bad US hurricane season [to see a sustained uplift in commercial premiums].

“You could still drive a semi-trailer through their margin guidance."

Few fund managers and analysts expect the insurer’s margins this year to be much above 16 per cent.

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Constellation Capital’s head of investment research, Peter Vann, said the upgrade was credible, noting it was partially due to revised currency assumptions between the Australian and US dollar.

“They will also receive more premium from recent US acquisitions this year rather than next year which is a bit surprising," he said.

“But QBE is nearly halfway through their catastrophe budget for the year."

Deutsche Bank analyst Kieren Chidgey said the profit upgrade was surprising given little had changed since the insurer’s result in early ­February.

“We view this more as a one-off upgrade and believe more meaningful upside is difficult without hardening commercial premium rates or higher interest rates – factors we can’t see playing out significantly in 2011," he said.

Mr Chidgey noted that while fiscal 2011 consensus earnings upgrades of between 4 per cent and 5 per cent were likely, the flow on in future years and QBE’s valuation were less clear given soft commodity price volatility. RBS analyst Richard Coles said the upgraded guidance showed that net earned premium forecasts on recent acquisitions were conservative.

“On the negative front, it has been a bad first quarter for claims with $US650 million in catastrophe claims so far, accounting for roughly half QBE’s fiscal allowance of around $US1.35 billion," he said.

“A continuation of such event frequency will only add to existing margin pressure."

UBS analyst James Coghill agreed.

“An element of caution ahead of the first-half result still appears justified given large [catastrophe] losses for the year to date and a likely skew of second-half profits," he said.

Mr Coghill said the investment bank remained positive on QBE’s outlook given key drivers such as US interest rates and investment yields were gradually turning.

Credit Suisse analysts downgraded their margin forecasts for the insurer from 15.5 per cent to 15.2 per cent.

“Given that net earned premium is up a minimum of 30 per cent and the insurance profit is increasing in line with this, it implies an insurance margin in line with fiscal 2010 [which was] 15 per cent," Credit Suisse analyst Andrew Adams said.

He noted cautious commentary from management at the annual general meeting around caveats to its margin guidance – such as potential impact from catastrophes – which suggested the lower range was likely.

Mr O’Halloran earlier suggested that the string of catastrophes in the Asia-Pacific so far this year, including the Japanese earthquake and tsunami, Queensland floods and cyclone, and the New Zealand earthquake, might prompt smaller reinsurers to leave the region.

Fund managers have since said that reinsurers are more likely to be drawn to the region given higher pricing for risk against a background of soft commercial premiums globally.